Chapter 21: Accounting Changes

What is the appropriate accounting treatment for a change in policy?

Retrospective Application

What is the appropriate accounting treatment for correction of an error under ASPE?

Retrospective Application (Adjustment)

Under IFRS, change in an accounting policy is permitted only when

- The change is required by a primary source of GAAP -The change results in portraying reliable and more relevant information about effects of transactions, events or conditons

Types of Accounting Changes

1. Change in Accounting Policy 2. Change in Accounting Estimate 3. Correction of Prior Period Error

What two criteria must be met in order for an accounting policy to be changed voluntarily?

1. New Policy must result in information that is more reliable 2. New policy must result in information that is more relevant to users

Change in Accounting Policy

A change in the choice of specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements

Change in Accounting Estimate

Adjustment based on a change in circumstances on which a previous estimate was based or as the result of new information, more experience, or subsequent developments

Retrospective Restatement

Accounting for error correction whereby corrections are reported in the financial statements as though the error never occurred

Prospective Application

Application of a new accounting policy whereby previously reported results remain and the new policy is adopted for the current and future periods only

Retrospective Application

Application of new accounting policy whereby its cumulative effect on the financial statements is calculated at the beginning of the period as if it had always been used

Non-Counterbalancing Error

Errors that are not offset in the next accounting period

Counterbalancing Error

Errors that self-correct over two periods

Changing from a weighted average cost flow formula to a formula based on FIFO

Example of Change in Accounting Policy

The initial Adoption of a new accounting standard

Example of Change in Accounting Policy

Arithmetic Mistake

Example of Correction of Prior Period Error

Change from accounting policy that is not generally accepted to an accounting policy that is acceptable or the inappropriate application of an acceptable accounting policy

Example of Correction of Prior Period Error

Correction of a Prior Period Error

Omissions from or mistakes in financial statements of prior periods caused by the misuse or failure to use reliable information that existed at the time financial statements were prepared

Under IFRS, what accounting treatment is appropriate for correction of an error?

Partial Retrospective Adjustment when Full Retrospective Restatement is impracticable

The underlying principle of the retrospective application method is to...

Present all comparative periods as if the new accounting policy had always been used